Monday, February 2, 2015

We are glad to inform you that Cera Sanitaryware today has made its life time high of Rs. 2460 on NSE and closed at Rs. 2399 gaining 12.5% during the day on back of strong quarterly results. Ceradeclaredits 3rd quarterresults today delivering excellent top line as well as bottom line growth. Company reported a 50.2% jump in its net profits at Rs. 16.16 crores against net profit of Rs. 10.76 crores in the same period of last fiscal. Company sales stood at Rs. 209.29 crores, up by 30.7% as against Rs. 160.14 crore in the same period last year.

Our equity analysts published Hidden Gem - Dec 2011 research report with Buy recommendation on Cera Sanitaryware (BSE Code: 532443, NSE Code: CERA) and shared it with all Hidden Gems members. Research report was published 3 years back on 24th Dec'11 and Buy was recommended on Cera Sanitaryware Ltd at average price of Rs. 157 with a target price of Rs 350. In last 3 years, stock has given more than 15 times returns to our Hidden Gems members.

Considering strong fundamentals of the company with robust YoY growth, we added Cera Sanitaryware in our Wealth-Builder portfolio almost 2 years back at price range of 350 - 450 and continue suggesting our subscribers to invest in this stock even at price range of up to Rs. 1100 - 1300 levels last year with a long term view. We have not suggested any profit booking in this stock so far and it turns to be a 15-bagger stock for our Hidden Gems members today. As on date, Cera Saniwaryware is giving whopping 1428% returns to our Hidden Gems members in period of 3 years.Moreover, recently we added Cera once again in our Portfolio of 15 Small & Mid Caps of 2015 (released on 1st Jan'15) at price of Rs. 1800 with portfolio allocation of 7%. Our members who invested in Cera at beginning of this year are sitting with overall gains of 33% today.

Note: Its important to diversify your small cap stock
portfolio, you can't justbet onone
or two stocks. Our objective is to protect & grow your capital
giving 100% to identify best of Hidden Gems but we do not
guarantee similar returns from all our recommendations. Few of our Hidden
Gems can perform better in a lesser span of time, few may take more
time and need to hold for longer period.

Below is the summary of Cera Sanitaryware Ltd published in our Hidden Gem research report - Dec'11.

1. Company Background

Launched in 1980, Cera is a pioneer in the sanitaryware segment in India. The first sanitaryware company to use natural gas, Cera has been on the forefront of launching a versatile colour range and introducing the bath suite concept. It also launched innovative designs and water-saving products. The twin-flush model launched in India by Cera for the first time, reduces the water needs of households considerably. WCs designed to flush in just 4 litres of water is another notable innovation by Cera.

Based
in Kadi, Gujarat, Cera Sanitaryware Ltd. uses International technology, which
has ensured Cera’s superiority over others in quality. Established with an
initial capacity of 3,600 MTPA, the plant has undergone several periodical
upgradations and modernisations to expand to 25,000 MTPA. To
achieve growth in the rapidly changing retail market in the country, Cera, has
launched its one of a kind Cera Bath Studios in Ahmedabad, Bangalore,
Chandigarh, Kolkata, Cochin and Hyderabad, Mumbai. With the opening of the Cera
Bath Studios, the discerning consumers, architects and interior designers can
have full view of the Cera’s premium ranges of WC’s, Wash Basins, Shower
Panels, Shower Cubicles, Bath Tubs, Shower Temples, Whirlpools, CP fittings
etc. Cera Bath Studios will complement its existing network of 600 dealers and
5000 retailers. Several Bathrooms are displayed live, so that the customers can
get a feel of Cera’s vast range of products.

Having shown a growth rate
of more than 25% since last 3 years, Cera Sanitaryware Ltd. today is the
fastest growing sanitaryware company in India. For its contribution
towards the industrial growth, Cera's ED 'Mr. Vidhush Somany' received
"The Nirman Ratna Award" in September 2010.

Revenue
Streams

1. For
Cera there are two revenue streams. Manufacturing and Outsourcing. The company
manufactures sanitary ware locally, while it outsources bath ware and faucet ware.

2.The
company has registered a good growth of 19% CAGR over the last 5 years in the
Sanitaryware segment. This is well above 12-13% industry growth.

3. In
the Outsourced premium segment, the growth has been more spectacular at 33%
CAGR over the last 5 years. Outsourcing doesn’t require the company to set up a
plant and therefore it’s relatively easier to scale up and test market the
products.

Strong Branding with Pricing Power

1. In
the Sanitary ware segment both the raw materials and the Power and fuel are the
major inputs. Over the last 5 years, while the cost of raw materials has not
increased much, the energy cost has gone up substantially.

2. In
case of Cera the company has been able to pass on any major increase in input
price without much lag, while it doesn’t have to reduce the prices in case the
commodity prices go down. A sign of both the branding power and efficient
management.

Cera
Sanitaryware Ltd (CSL), has unveiled a new logo to capture the imagination of
young and modern India. “Our new logo is the most sweeping transformation of
the company’s corporate identity ever since it started its journey in 1980,”
says Vidush Somany, executive director of the company. “Cera is one of the most
preferred brands in the country, and the trust it generates from its customers
is immeasurable. We are giving our logo a more contemporary look that is
relevant for business today.”

Delving in to
the semantics of the new logo, Somany explains, “Our new logo has been designed
by the Ahmedabad-based creative agency Aakriti Promotions & Media Ltd, and
has been infused with a sense of dynamism and openness. It is free from its
boundaries, just as we are all set to become a total bathroom solutions
provider. It aspires to evolve as a brand that provides style solutions to its
core target group. Besides, the new and modern typeface indicates a strong
sense of purpose and confidence in the brand’s ability.”

Somany believes
that the new logo will connect seamlessly with the company’s customers,
business associates and influencers. “Retaining the blue colour keeps Cera
connected with its rich heritage of design and innovation for which it is
immensely popular. While remaining rooted, it also aspires to adhere to core
values of stability and sincerity.”

According to
Somany, Cera has become a versatile brand by virtue of its expansion into new
markets, creation of new businesses and strengthening of capabilities. “We are
targeting those areas where our presence has been minimal. Soon our company
will significantly scale up capacity from the current 75,000 pieces per month
at the new faucet plant at Kadi. We will also aggressively increase the
production of sanitaryware from 20 lakh pieces to 27 lakh pieces per annum to
make it the largest plant in the country. Our new logo reflects this
versatility.”

Along with the
launch of the logo, CSL is also rejuvenating its marketing programmes. “We will
kickstart our media campaign from December, which will spill over to the next
financial year and span print, television and hoardings. We have signed up
Bollywood actress Dia Mirza for endorsing the Cera brand. Our customers will
get to see the new logo on all the products, packaging and signages within the
next three to four months.” He adds that an array of new designs in
sanitaryware and other products will also be launched in the coming year. “In
our faucet vertical, we have launched four new ranges, and are planning to roll
out some more shortly. Very soon, a new display centre will be thrown open in
the western suburb of Mumbai.”

Cera Sanitaryware looks at acquisition in Italy, Oct 13, 2011.

Cera Sanitaryware Ltd, the
third largest sanitaryware maker in India, is in talks with a number of
companies to acquire a brand and a factory in Italy. Cera's board of directors
is likely to take a decision on this by next year. Apart from this, the company
is also in the process of expanding its manufacturing facility at Kadi in North
Gujarat involving an investment of Rs 100 crore over the next couple of years.

With a view to catering to high end sanitaryware
segment in India, we are looking at acquisition in Italy. This would be the
first acquisition by Cera outside India," said Vidush Somany, executive
director, Cera Sanitaryware Ltd. However, he did not disclose the size of the
acquisition and the names of the Italian companies that Cera is in dialogue
with.

According to Somany, the
company is looking at acquiring either a brand or a factory or brand and
factory both. Apart from this, the company may also buy out a research and
development (R&D) studio. Cera has been scouting for a suitable company for
almost a year.

Cera, which currently enjoys
21-22 per cent share in Rs 1500 to Rs 1800 crore organised sanitaryware market
in India, is increasing the production capacity of its sanitaryware division at
Kadi facility from current 2 million pieces to 2.7 million pieces. The
expansion is slated to be completed by April 2012. In addition to this, the
taps manufacturing division will see its capacity going up almost three times
to 2 million pieces from current 0.7 million pieces over the period of next 12
to 18 months.

"For sanitaryware
division around Rs 60 crore will be infused, while for taps capacity increased
Rs 40 crore would be pumped in," said Somany adding that the company is
eyeing to capture 25 per cent market share by next year.

The company is also
aggressively entering into luxury segment of shower enclosures, shower trays
and equipped panels and cubicles. It has also tied-up with Italian company
Novellini for this.

At present the company is
the third largest player in Indian sanitaryware market with 21-22 per cent
market share, while Hindustan Sanitaryware and Industries Ltd (HSIL) is on top
with 41 per cent followed by Global giant Roca Bathroom Products Pvt Ltd with
26 per cent.

Net profit of Cera Sanitaryware rose
25.62% to Rs 7.65 crore in the quarter ended September 2011 as against Rs 6.09
crore during the previous quarter ended September 2010. Sales rose 28.90% to Rs
73.29 crore in the quarter ended September 2011 as against Rs 56.86 crore
during the previous quarter ended September 2010.

Cera Sanitaryware net profit rises 15.19%
in the June 2011 quarter

Net profit of Cera Sanitaryware rose
15.19% to Rs 6.90 crore in the quarter ended June 2011 as against Rs 5.99 crore
during the previous quarter ended June 2010. Sales rose 27.29% to Rs 64.64
crore in the quarter ended June 2011 as against Rs 50.78 crore during the
previous quarter ended June 2010.

4. Key Concerns / Risks (as on 24 Dec'11)

1. Over
the last 1 year the raw material prices and the prices of other key inputs have
increased, while on the same hand the global economy is slowing down. The
company could be in for some tough times over the short term.

2. In
view of the inflationary environment, the RBI has continued with its monetary
tightening. The same is hurting the growth and more specifically that of Real
estate. The sale of Bath fittings is directly proportional to growth in real
estate as replacement demand commands a very small share.

3. Jaguar and other
local and foreign brands are trying their hands at Indian Sanitary ware market. Jaguar has a very strong brand
identity and distribution network. We believe it could come across as a major
competitor to the established players.

5. Investment Rationale (as on 24 Dec'11)

Strong Brand Equity – In the sanitary ware segment,
there’s strong brand identity against that in Tiles segment. At present there
are only three major players i.e. HSIL, Parryware Roca and Cera. Cera’s
achievement of 20% + market share is commendable in the light of the fact that
Cera started almost 20 years later than HSIL and 30 years later than Parryware.

Strong Marketing & Distribution network
– Cera sells it’s
products through a marketing network of 500 dealers and 5000 retailers spread
across the country. It’s difficult to replicate such a network and is one of
the major business moats for Cera against the onslaught from foreign players
and other local players.

Relatively slowly changing industry - It’s a relatively slow changing
business (makes it easier for us to hold it for long term in comparison to
education or technology stocks where the trends change very fast and thus a
company doing well today may end up on a losing side in a very short period of
time).

No Institutional holding - There’s no institutional holding in
Cera, probably because of low liquidity. There is a very high probability the
stock can get re-rated to higher PE multiples once it comes in sight of smart
investors. At present the stock is quoting at 6.8 times trailing twelve months
earnings.

Very attractive valuations – Murugappa group sold of their 47%
stake in Parryware-Roca joint venture in 2008 for a sum of Rs 720 crore while
the company had recorded a turnover of Rs 360 crore for FY 08, thus valuing the
company at 4 times its annual turnover. Cera’s market cap is approximately
equal to its annual sales. Though not 4 times, however Cera can still get
re-rated to twice the annual sales considering its efficiency and growth.

Regular Dividend Income – Since 2002, company has
continuously rewarded its share holders paying regular dividend. Management has
increased the dividend payouts every year from 2003. In last 8 years, dividend
payout is increased by almost 9 times from Rs. 0.30 per share in year 2003 to
Rs. 2.50 per share in 2011.

6. Saral Gyan Recommendation (as on 24 Dec'11)

i) Cera Sanitaryware net
sales have grown at a rate of 26% on yearly basis during last 6 years whereas
industry growth average is around 12-13%. Being into manufacturing sector, Cera
commands higher margins, operating margins are at 20% and PAT margins are above
10%. PAT margins improved significantly from 4% in FY 2005 to 10.4% in FY 2011.

ii) Cera has achieved sales growth of
26% during last 6 years without any major equity dilution or debt funding and
now it’s a debt free company. Moreover, company is evaluating various
parameters for an acquisition opportunity in Italy.

iii) For FY 2011, company has achieved
100% capacity utilization and in view of strong demand, it is increasing the
production capacity of its sanitaryware division at Kadi facility from current
2 million pieces to 2.7 million pieces. The expansion is expected to be
completed by April 2012. In addition to this, the faucetware manufacturing
division will see its capacity going up almost three times to 2 million pieces
from 0.7 million pieces over the period of next 12-18 months.

iv) Cera Sanitwaryware Ltd is
consistantly paying dividends since 2002 to reward its shareholders. In last 10
years, dividend payout is increased by almost 9 times to Rs 2.5 per share in FY
2011 compared to Rs. 0.30 per share in FY 2002. Visibility
of robust earnings in FY 2012-13 on account of increased production capacity,
acquisition opportunity in Italy and increase in housing demand due to
softening of interest rates makes CSL a good buy at current market price for investors
who can hold it for period of 12-24 months.

v) At current market price
of Rs 166.40, dividend yield works out to 1.5%. On equity of Rs. 6.33 crore the
estimated annualized EPS for FY 2012-13 & FY 2013-14 works out to Rs. 32
and Rs. 44 respectively. Book value per share is Rs. 88.15 and at CMP of Rs. 166.40,
stock price to book value is 1.89. Currently, the scrip is trading at 5.2X FY
2012-13 and 3.8X FY 2013-14 estimated earnings which make CSL an attractive bet
at CMP.

Considering ongoing expansion, healthy operating margins
with effective brand positioning and pricing power, better earning visibility
on account of robust demand and strong marketing and distribution network, Saral
Gyan Team recommends “BUY” on Cera Sanitaryware Ltd for a target price of Rs. 350
over a period of 12-18 months.

Saral Gyan Capital Services

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